REMA | Energy UK calls for full grandfathering for existing generators

Energy UK has called for all existing energy assets to be insulated from changes flowing from the government’s Review of Electricity Market Arrangements (REMA).

The trade association said this should apply if investment decisions are made before the final package of reforms becomes known.

Energy UK claims that full grandfathering will provide a “crucial signal to future project investors” whose perceptions of policy and regulatory risk in Great Britain is important given the “ongoing competition between jurisdictions for investment”.

In its response to the second REMA consultation, Energy UK states that the Department for Energy Security and Net Zero (DESNZ) must “provide clarity as soon as possible to industry regarding which projects will have legacy arrangements, and what these will look like”.

“Industry needs further information from DESNZ about how arrangements would impact revenues for both legacy and pipeline assets, before being able to give a clear view on any risks,” it adds.

The trade body’s primary concern is the possible introduction of zonal power pricing – the most radical and controversial market reform still on the table after the government ruled out more granular nodal pricing in March.

Energy UK said although a minority of its members support zonal pricing – recognising its potential to reduce network constraints and balancing costs – most are unconvinced of these benefits, which require further analysis, and would prefer more evolutionary changes to other market arrangements.

It said the introduction of zonal pricing would require the government to make a series of design choices, including on the number of zones, the Contracts for Difference (CfD) reference price, the CfD pot size and budget methodology, and the length of financial transmission rights: “Only once these choices are made, will industry be able to fully assess any impacts on the market.”

Energy UK welcomed the government’s proposals to protect CfD-supported generators by using zonal prices as reference prices for CfDs but said this is “not enough,” even for these generators.

The trade body said zonal pricing will expose generators to a number of new risks, including: lower prices in some zones; reduced prices as the result of transmission delays; greater incidence of zero or negative prices in some zones, affecting CfD revenues for generators subject to negative price rules; reduced liquidity, making trading more difficult and increasing the risk they are unable to achieve CfD reference prices; and the loss or reduction of curtailment payments.

Energy UK said full grandfathering must be applied to all generators that do not have certainty on the final REMA outcomes, including those that are supported by the Renewables Obligations scheme or are operating on a fully merchant basis. It said this should likewise apply to the “merchant tail” of CfD-supported generators.

“The government must clearly state how any grandfathering would occur as soon as feasible to ensure that investor confidence can be maintained,” it urged.

“Whilst grandfathering would reduce some of the stated benefits of a move to a zonal pricing model, existing support scheme commitments must be honoured to ensure that investors are kept whole against their expectations at the time of investment.”

Energy UK said non-CfD generators should be protected through the use of financial transmission rights – financial instruments that allow holders to receive compensation for price spreads between markets caused by network congestion.

The association said there also needs to be consideration of the impact on both generators and offtakers in corporate power purchase agreements (CPPAs), noting that the prospect of zonal pricing is already affecting demand for PPAs as participants look to add protection clauses: “This has and will continue to stifle uptake of CPPAs until there is greater clarity about the potential for zonal pricing.”

It said the actual introduction of zonal pricing could lead to more significant disruption as participants seek to renegotiate terms if they are located in a zone within a more favourable price.

Energy analysts recently warned that REMA is having a “chilling effect” on the energy industry, with investors adding “risk premia” to projects to reflect the current uncertainty they face.